U.S. government’s house price manipulations choke economic recovery

“Financial markets took a big tumble Wednesday on a series of lackluster economic reports, but the more distressing news was intellectual. Despite at least a decade of contrary evidence, the media and business classes still clamor for a miraculous housing recovery that will save the U.S. economy. The sooner we shed this illusion, the faster America will return to robust and sturdy growth.” Editorial, ‘The Housing Illusion’, The Wall Street Journal, June 2, 2011

This Column has noted on several occasions during the past 12 months that political manipulation of the housing market has severely damaged the United States economy. The worst manipulations occurred over the period 2001-2007, following the dot.com stock market crash and subsequent economic recession of 2001-2. President George W. Bush , Congressman Barney Frank, and Senator Christopher Dodd were the worst of a very bad set of politicians. Alan Greenspan and Ben Bernanke demonstrated a depressingly low level of monetary expertise and independence in facilitating the political objectives of their masters.

The crude political goal of the deviants in charge of the U.S. government was to cram some 4-5 million additional households into a home-ownership that they could not feasibly afford. To this end, a monetary furnace roared to hold interest rates below underlying market values, government agencies were deployed to securitize mortgages of junk quality and to sell them off in brown paper packages to unsuspecting buyers, Households were encouraged to lie about their income status, and negative equities were welcomed as the basis for house purchase.

When the house price bubble burst in 2007, average prices were some 4o to 45 per cent above true market prices. So far average prices have fallen back some 32 per cent from the peak. They still have at least 10 per cent to go. So why has the market been so slow to clear?

Because a new set of politicians and bureaucrats, for crude electoral purposes, have intervened to try to stamp out the market adjustment. Among these, President Barack Obama, his first-round economic advisors, Summers and Romer, Congressman Barney Frank and former Senator Christopher Dodd, Ben Bernanke at the Fed. and Timothy Geithner at Treasury must be held primarily responsible.

Of the 4 to 5 million realistic renters lured unrealistically into home-ownership between 2001 and 2007, some 1.5 million are still there, maneuvering as best they can to evade economic reality. As the politicians pressure banks to delay foreclosures, and as they challenge their eviction decisions, so the rest of the economy pays a huge price. The over-hang in the market delays the ability and willingness of viable first-time buyers to enter the market, and delays the trickle down effect on construction, house furnishing and appliance acquisitions that would give the economy a genuine upward thrust.

A constitutional republic secures the government that it deserves. The evidence is now compelling that the majority vote in the United States is ill-educated in economics and careless of its long-term economic future. In such circunmstances, economic growth will be miniscule and stock markets will be increasingly volatile while they most likely trend downwards in the United States.